More harm than good

Diwali, the festival of lights, among various mythological interpretations, is supposed to signify the ushering in of Ram Rajya — a land of bliss for the people and prosperity with the flow of milk and honey. However, other mythological interpretations suggest that in today’s Kaliyuga, the opposite happens.

Leaving aside such interpretations, the stark reality of our people shows that this festive season, far from being celebratory, is a period of increasing woes. This is confirmed by the HT-Hansa survey (November 11). This is normally the period when workers receive their annual bonuses. The survey shows that 47.2% did not receive any bonus and an additional 22.7% received less than expected. It is little wonder that more than 60% reported spending less this festive season than usual and nearly 57% had put off buying any consumer durable. The economic slowdown and relentless inflation is, obviously, taking its toll. That we are creating two Indias, with the hiatus between them widening, is also confirmed with 20% saying that they will spend more this season. Not surprisingly, gold prices are expected to cross Rs 35,000 per 10 gm.

In order to tackle the economic slowdown, this UPA government proposes to march along with GenNext reforms of financial liberalisation to attract greater inflow of foreign capital. This, it is presumed, will increase the levels of investment leading to a higher growth. The fundamental flaw of this diagnosis is that no amount of increased investments will lead to growth unless people have the necessary purchasing power to buy what is produced. Clearly, the opposite of this is happening and, hence, the hopes of high growth from such reforms will remain an illusion.

India is adopting such a strategy to revive its economy at a time when the US and, indeed, the global economy is bracing itself to face the consequences of what is called the US “fiscal cliff”. If both the Republican and Democrat lawmakers do not arrive at an agreement, as it appears to be, the newly re-elected President Barack Obama would be helpless. The levy of new taxes and automatic spending cuts are set to take effect from the beginning of 2013. The impact would be devastating, leading, according to some analysts, to as much as 4-6% decline in America’s GDP. Such a falling of the ‘cliff’ would push not only the US into prolonged recession but also lead to a global economic devastation. The Fitch, a rating agency, says that this would push the global economy into recession and “halve the rate of global growth in 2013”.

This will mean the end of existing Medicare allowances, employee tax holiday and the loss of child and income credits. For 60% of the US population — middle class — the US Tax Policy Centre estimates that the additional tax rise would be around $2,000 per earner.

The roots of this crisis date back to 2001 when then President George Bush pushed through a programme of tax cuts for the rich, worth $1.7 billion, in the absence of a majority in the US Congress. Under US Rules, such a presidential directive automatically expires after 10 years. This means it expired last year. When Obama was first elected in 2008, a deal was struck to extend the deadline by two years and the setting up of a committee to find ways of capping government spending. In the absence of any Congressional agreement, by December 31, the committee recommendations for higher taxes and drastic expenditure cuts would be automatically triggered. So the bomb is now ticking.

When Bill Clinton demitted office in 2001, the US was the largest indebted country with a national debt of $5.9 trillion. Since then the Congress has raised this statutory debt ceiling 13 times to stand at $16.4 trillion. Since Obama assumed office, this ceiling has been revised five times.

President Obama’s re-election campaign focused on raising taxes on families earning more than $250,000 a year to pay for deficit reductions and to fund social welfare spending. The Republicans, however, are dead against any increase in the tax rate for the rich.

In this background, India’s GenNext reforms can only spell further disaster for our people. With the impending crisis, international finance capital is in search of newer avenues for its profits. Permitting such capital to further enter the Indian economy through multi-brand retail trade, increasing the FDI cap in the insurance and banking sectors and in pension funds would place humongous amounts of working people’s lifelong savings at the disposal of foreign capital, making India extremely vulnerable to international financial fluctuations.

Instead of focusing on expanding domestic demand through increased public investments to build our much needed infrastructure — this would generate substantial new employment — the current trajectory of GenNext reform will only lead to a further contraction of domestic demand. This, in turn, will heap further misery on our people. After winning the elections, even Obama said, “Even as we negotiate a broader deficit reduction package, Congress should extend middle class tax cuts right now,” arguing that this will give 98% families and 97% small businesses the certainty that this will lead to faster growth.

The finance minister, at the recent International Monetary Fund meet in Tokyo, expressed our concern by saying, “Should the economic situation in the US worsen, its impact on emerging market economies will be much more severe than in the case of the situation in the Euro area”. However, instead of meeting such an impact by strengthening India’s domestic demand, India is pursuing such reforms that would make us more vulnerable. This needs to be reversed.